Property fundamentals continue to stutter. This is the prognosis contained in the latest issue of Rode's report on the South African property market.

Hindered by general economic uncertainty, growth in the demand for office space has not been forthcoming. The result of this has been vacancy rates that are obstinately refusing to drop, and market rentals that are at best showing feeble growth.

In the third quarter of last year, rentals in the Pretoria s uburbs s howed the best annual growth of 2 percent. Nominal rentals in Joburg decentralised grew by 1 percent, while office rentals shrank in the suburbs of Cape Town by 1 percent and in Durban by 4 percent.

Property valuer and economist Erwin Rode of Rode & Associates, says: "Irrespective of the region - and assuming building- c ost i nfl at i on of r oughly 1 0 percent - this implies that real office rentals declined by between 7 percent and 14 percent."

Weaknesses in the manufacturing and retail sectors - the t wo support pillars of t he industrial property market - are likely to continue to place a lid on demand and, consequently, on rental growth. In the third quarter of last year, nominal rentals in the East Rand, Central Witwatersrand, Durban and the Cape Penins ula were modestly up by between 4 percent and 4.5 percent.

Indeed, it seems only capitalisation rates are holding their own on the non-residential front as they continued to move sideways in the third quarter of last year. Capitalisation rates are the property equivalent of the forward earnings yield of equity. When they rise, market values tend to drop, and vice versa.

Rode says this means investors still like income-producing property. This is in spite of the pressure on cash flows owing to stubborn vacancy rates, poorly performing market rentals and fast-rising operating costs.

I n recent quarters, the growth in flat rentals has started to accelerate to such an extent that in the third quarter of last year flat rentals were - nationally - up by a yearly rate of 6 percent.

Rentals on houses could only achieve growth of about 4 percent whereas those on t ownhouses r e mained a t roughly the same level they were a year ago.

Over the same period, consumer prices (excluding owners' equivalent rent) showed growth of roughly 5 percent, implying that flat rentals were at least able to show real growth.

There are more factors that are likely to weigh down and dampen house prices than factors likely to support a recovery in prices.

The return to growth in the value of new mortgage loans granted naturally bodes well for prices. But on the flip-side there are many things that will retard the growth in house prices. These are:

Consumer-price inflation that is uncomfortably close to the upper limit of the target range, diminishing the hope of an interest-rate cut in the near future.

Broad-based weaker economic growth, which is likely further to scupper employment and disposable-income growth.